Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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The Battle over Consumer Liability for eP2P
Criminals like to use electronic person-to-person/peer-to-peer (eP2P) payments services to execute scams because of the speed and finality with which they can receive their ill-gotten funds. Unfortunately, this very speed and finality can leave victims with no money and often no way to get it back. I posted a few months ago about some litigation brought by consumers against financial institutions (FI) in situations where consumers voluntarily sent funds to scammers using an eP2P service. When the consumers later realized they had been taken, they sought reimbursement from their financial institutions under the liability protections provided under Regulation E. However, because the consumers initiated the funds transfers themselves, these instances did not meet the definition of being unauthorized and were therefore not eligible for reimbursement. I suggested, from my layperson's perspective, that the definition of an "unauthorized transaction" in Reg E was quite definitive in covering only transactions initiated by unauthorized third parties.
Senator Elizabeth Warren (D-MA) released a report last October calling on the Consumer Financial Protection Bureau (CFPB) to "clarify and strengthen" Reg E with regard to the eP2P service offered by Zelle. Although the report focuses on Zelle, other eP2P services such as PayPal/Venmo and Cash App are also used in such scams, as I mentioned at the beginning.
In response to the report and as a follow-up to an earlier meeting with the CFPB, the American Bankers Association (ABA) released a letter on October 27 to CFPB director Rohit Chopra refuting Senator Warren's claims. The letter points out that "fraud is de minimis relative to the transaction volume, with 99.9 percent of the 5 billion Zelle transactions processed in the past 5 years without issue." The ABA letter cites the numerous steps that Zelle and its participating FIs have taken to educate customers and implement safeguards to protect customers against potential scams.
And in the latest development, a recent Wall Street Journal article reported that the Zelle owners were in discussions to develop a reimbursement plan for scam victims. Under the plan, which would apply to all FIs participating in the Zelle network, if it's determined that the customer was tricked into sending funds, the receiving FI would reimburse the initiating FI, which would then reimburse the customer. A major challenge in this process will be like what the United Kingdom's Contingent Reimbursement Model is facing: finding a way to consistently determine whether a reasonable person would be tricked.
One concern is that such a voluntary reimbursement policy could lead to "first-party fraud," whereby the customer claims to be a victim of a scam but is actually colluding with the recipient of the funds. We will continue to closely monitor and report on developments in this issue.
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